business environment

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Industrial Policy

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Industrial Policy

• It covers rules, regulations, principles, policies, & procedures laid down by government for regulating & controlling industrial undertakings in the country.

• It prescribes the respective roles of the public, private, joint, cooperative large, medium & small scale sectors for the development of industries.

Industrial Policy Contd...

• It incorporates fiscal & monetary policies, tariff policy, labor policy.

• It shows the government attitude not only towards external assistance but also toward public & private sectors.

Main Objectives• To maintain a sustained growth in

productivity• To enhance gainful employment• To prevent undue concentration of

economic power

Main Objectives• To achieve optimal utilization of human

resources• To attain international competitiveness

and• To transform India into a major partner

and player in the global arena

Introduction of DIPP• The Department of Industrial Policy &

Promotion was established in 1995 and has been reconstituted in the year 2000 with the merger of the Department of Industrial Development.

Industrial Policies

• Industrial Policy Resolution of 1948• Industrial Policy Resolution of 1956• Industrial Policy Resolution of 1973• Industrial Policy Resolution of 1977• Industrial Policy Resolution of 1980• The New Industrial Policy of 1991

Industrial Policy 1991

• Policy focus is on ––Deregulating Indian industry;–Allowing the industry freedom and

flexibility in responding to market forces and

–Providing a policy regime that facilitates and fosters growth of Indian industry.

Industrial Policy 1991• In pursuit of the industrial objectives,

Government decided to take a series of initiatives in respect of the policies relating to the following areas:

– Industrial Licensing– Foreign Investment– Foreign Technology Agreements– Public Sector Policy– MRTP Act

Industrial Licensing Policy• The Industrial Policy Resolution of 1956

identified the following three categories of industries: – Those that would be reserved for

development in public sector.– Those that would be permitted for

development through private enterprise with or without State participation.

– Those in which investment initiatives would ordinarily emanate from private entrepreneurs.

Industrial Licensing Policy• Industrial Licensing is governed by the

Industries (Development & Regulation) Act, 1951.

• Industrial licensing was abolished for all industries, except those specified (18 industries), irrespective of levels of investment.

Foreign Investment• Limit on foreign equity holdings raised from

40% to 51% in a wide range of industries• Foreign Equity Proposals need not to be

accompanied by Foreign Technology Transfer Agreement

• Procedure for FDI streamlined by creating a Foreign Investment Promotion Board to consider individual application case by case

Foreign Technology Agreements

• Foreign technology agreements in high-priority industries upto Rs. 1 crore were given automatic permission.

• No permission was required for hiring foreign technicians and foreign testing of indigenously developed technologies.

Public Sector Policy• List of industries reserved for the public (Schedule

A) reduced from 17 to 8

• List of sector reserved for dominance by public sector (Schedule B) effectively abolished

• Disinvestment in selected public sector enterprise to raise finance for development, bring in greater accountability & help create a new culture in their working for improved efficiency

MRTP Act• Removed the threshold limits of assets in respect of MRTP

companies and dominant undertakings • Eliminated the requirement of prior approval of Central

Government for– Establishment of new undertakings– Expansion of undertakings– Merger, Amalgamation and Takeover– Appointment of Directors under certain circumstances.

• The newly empowered MRTP Commission will be authorised to initiative investigations on complaints received from individual consumers or classes of consumers in regard to monopolistic, restrictive and unfair trade practices.

FOREIGN EXCHANGE REGULATION ACT(1973)

Foreign exchange is the system or process of converting one national currency into another, and of transferring money from one country to another

FOREIGN CURRENCY• Foreign currency means any currency other than

Indian currency.

FOREIGN SECURITY

• Foreign security means any security, in the form of shares, stocks, bonds, debentures or any other instrumental denominated or expressed in foreign currency and includes securities expressed in foreign currency but where redemption or any form of return such as interest or dividends is payable in Indian currency.

The 1973 law was created during the tenure of Prime Minister Indira Gandhi with the goal of conserving India's foreign exchange resources. The country was facing a trade deficit, which was followed by a devaluation of the currency and an increase in the price of imported oil. The act specified which foreign exchange transactions were permitted, including those between Indian residents and nonresidents.

AN INTRODUCTION TO FERA

• The FERA (Foreign Exchange Regulation Act) deals with laws which relate to foreign exchange in India

• The laws were made to manage foreign investments in India. The FERA has its origin at the time of Indian Independence.

• .In the beginning, it was a temporary arrangement to  control the flow of foreign exchange. In 1957 the act was made permanent. As the industrialization grew in India, there was an increase in the foreign exchange investments. As a result, there arose a need to protect it.

• . Accordingly, in 1973 the Foreign Exchange Regulation Act was amended.

• FERA consists of 81 complex sections

• Under FERA, any offence was a criminal one which included imprisonment as per code of criminal procedure, 1973.

OBJECTIVE’S

• prevent the outflow of Indian currency

• To regulate dealings in foreign exchange and securities

• To regulate the transaction indirectly affecting foreign exchange

• To regulate import and export of currency and bullion

• To regulate employment of foreign nationals• To regulate foreign companies• To regulate acquisition, holding etc of immovable

property in India by non-residents

To regulate certain payments .

To regulate dealings in foreign exchange and securities.To regulate the transactions indirectly affecting foreign exchange.

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PROVISIONS

• Regulation of dealing in foreign exchange.

• Restrictions on payments.

• Restrictions regarding assets held by non residents and import & export of certain currency & bullion .

• Duty on persons entitled to receive foreign exchange and payment for exported goods.

cont…

• Restriction on appointment of certain persons and companies as agents or technical or management advisers in india

• Restriction on establishment of place of business in india

• Prior permission of Reserve Bank required for taking up employment in india by nationals of foreign state

• Restrictions on immovable property

AMENDMENTS TO THE ACT

• Government proposed to introduce comprehensive amendments in FERA due to changes in economic policy ,especially liberalization of industrial sector and most to open up the economy through changes in trade policy and encouragement of foreign investment .As a result ,the required changes were announced in budget speech of 1992-1993. The changes so introduced by issue of notification by RBI or Central Government.

• cont…

• The important changes are :- Power of central government to direct payment in foreign currency in certain cases. Export & transfer of securities.

Custody of securities by a depository or any other person.

Restrictions on the holding of immovable property outside India.

Restriction on persons resident in India associating themselves with or participating in concerns outsides India.

Regulation on booking passages outside India & restriction on foreign travel.

Foreign Exchange Management Act (FEMA), 1999

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Foreign Exchange Management Act (FEMA),1999

• Enacted in 1999, replaced the earlier Foreign Exchange Regulation Act (FERA), 1973.

• Came into force on the 1st day of June, 2000;

Objectives of FEMA:

1. To facilitate external trade and payments; and

2. To promote orderly development and maintenance of foreign exchange market in India.

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FEMA (continued) -

• To investigate into violations of the Act, the Central Govt. has established a department called ‘Enforcement Directorate’.

• This Act extends to the whole of India and also applies on all branches, offices and agencies outside India owned or controlled by a person resident in India. It is also applicable on any contravention committed outside India by any person to whom this Act is applicable.

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Various provisions (measures) of FEMA, 1999

• Section 3 - Prohibits dealings in foreign exchange except through an ‘authorised person’ (forex dealer).

• Section 2(c) - defines ‘authorised person’ as one who is an authorised dealer, money changer, off shore banking unit or any other person for the time being authorized (by RBI) to deal in foreign exchange or foreign securities.

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• Section 4 – provides that no person can, without a general or special permission of the RBI-

(a) Deal in or transfer any foreign exchange or foreign securities;

(b) Make / receive any payment to/from any person resident outside India;

(c) Enter into any financial transaction for acquiring any asset outside India.

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Section 5 - provides that any person may sell or draw foreign exchange to and from an authorised person for a current account transaction, provided that the Central Government may, in public interest, impose such reasonable restrictions as may be prescribed.

Section 6 - provides that any person may sell or draw foreign exchange to and from an authorised person for a capital account transaction, provided that the Central Government may, in public interest, impose such reasonable restrictions as may be prescribed. 36

• Section 7 -  deals with export of goods and services. Every exporter is required to furnish to the RBI or any other authority, a declaration regarding full export value.

• Section 8 - casts the responsibility on the persons resident in India who have any amount of foreign exchange due or accrued in their favour to get same realised and repatriated to India within the specific period and the manner specified by RBI.

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• Sections 10 and 12  - deal with duties and liabilities of the authorised persons.

• Sections 13 and 15 - of the Act deal with penalties and enforcement under the Act.

• Section 36 and 37 - pertains to the establishment of Enforcement Directorate and its powers to investigate any violation of under the Act.

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ENFORCEMENT DIRECTORATE (ED)

The ED is mainly concerned with enforcing the provisions of the FEMA for preventing the leakage of foreign exchange. Such leakage of foreign exchange generally occurs through following malpractices (contraventions of FEMA):-

1) Foreign exchange remittances by Indians otherwise than through normal banking channels;

2) Acquisition of foreign currency illegally by a person in India;

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Continued -

3) Non-repatriation of export proceeds;

4) Under-invoicing of exports and over-invoicing of imports and any other type of invoice manipulation;

5) Unauthorised maintenance of accounts in foreign countries;

6) Illegal acquisition of foreign exchange through Hawala.

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Difference between FEMA and FERAPoints of Comparison FEMA -2000 FERA -1973

1.Content There are 49 sections out of which 12 section relate to operational part and rest with penal provisions

There were 81 sections out of which 32 sections related to operational part and rest deals with penalty, appeals etc.

2. Nature Basically it is a civil law It was considered as a criminal law

3. Applicability The Act applies to all branches , offices and branches outside India owned or controlled by a person resident in India

The Act applied to all citizens of India and to branches and agencies outsides India and to branches and agencies outside India

4. New Terms Capital account transactions, current account transactions, persons, services like new terms are introduced.

These terms were not defined.

5.Penality Limited to three times the sum involved if it is quantifiable .If it is not quantifiable .

Five times of the sum involved + imprisonment in most of the cases

6. Object The object is to encourage external trade.

The object was to control, regulate and prohibits foreign exchange transactions

7. Legal Help The complainant has full right to take legal help from a lawyer or a chartered accountant

There was no provision for legal assistance

8.Power of Police Authorities

The power to the police officers has restricts to great extent

Extensive powers had given to police officer

9. Definition of “authorized person”

It has been extended to include banks, money changes, off shore banking units etc

It was limited in case of FERA

10.Definition of “Resident”

The term has defined in accordance with income tax act

The term defined was not in accordance with income tax act

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Competition act 2002

Definition of competition

Competition is “a situation in the market in which firms or sellers independently strive for the buyers’ patronage in order to achieve a particular business objective for example, profit, sales or market share” (World Bank, 1999)

What is competition in the market?In common parlance, competition in the market means Sellers striving independently for buyers’ patronage

to maximize profit or other business objectives. Buyer prefers to buy a product at a price that

maximizes his benefits whereas the seller prefers to sell the product at a price that maximizes his profits.

Why do we need competition in the market?Competition Makes enterprises more efficient and offers wider

choice for consumers at lower prices. Ensures optimum utilization of available resources. Enhances consumer welfare since consumer can buy

more of better quality products at lower prices. Beneficial for the consumers, producers/sellers and

finally for the whole society since it induces economic growth.

What is meant by unfair competition?

Collusive price fixing, Deliberate reduction in output in order to increase prices, Creation of barriers to entry, Allocation of markets, Tie-up sale, Predatory pricing, Discriminatory pricing.

What constitutes competition policy? Government measures that affect the behavior of enterprises and structure of the industry with the view to promote efficiency and maximize welfare.

Two elements of competition policy: First, a set of policies, such as liberalized trade policy, relaxed FDI policy, de-regulation, etc., that enhance competition in the markets. Second, legislation to prevent anti-competitive practices with minimal government intervention.

Competition Law - It is a tool to implement and enforce competition policy and to prevent and punish anti competitive business practices by firms and unnecessary Government interference in the market.

Competition Law generally covers three areas: Anti-competitive Agreements e.g., cartels Abuse of dominant position by enterprises e.g., predatory

pricing, barriers to entry and Regulation of Mergers and Acquisitions

Salient features of the Act Prohibition of Anti-competitive Agreements Prohibition of abuse of dominance Regulation of combinations Establishment of Competition Commission of

India and functions and powers of CCI Objectives of Competition Act

To prevent anti – competitive practices, Promote and sustain competition Protect the interest of the consumers Ensure freedom of trade

How would the objective of the Act achieved?

Competition Commission of India (CCI) which has been established by the Central Government with effect from 14th October, 2003.

Functions of CCI

CCI shall prohibit non-competitive agreements and abuse of dominance, and regulate combinations (merger or amalgamation or acquisition) through a process of enquiry.

It shall give opinion on competition issues on a reference received from authority established under any law (statutory authority)/Central Government.

CCI is also mandated to undertake competition advocacy, create public awareness and impart training on competition issues.

What orders the Commission can pass in case of anti-competitive agreements and abuse of dominance?

Grant interim relief restraining a party from continuing with anti competitive agreement or abuse of dominant positionTo impose a penalty of not more than 10% of turnover of the enterprises and in case of cartel – 3 times of the amount of profit made out of cartel or 10% of turnover of all the enterprises whichever is higherCommission may direct a delinquent enterprise to discontinue and not to re-enter anti-competitive agreement or abuse the dominant positionTo award compensation To modify agreementTo recommend to the Central Government for division of enterprise in case it enjoys dominant position

What is Globalization• Globalization is the process of international

integration of products, technologies, human resources, capital, information and cultures. It is characterized by increasing social and economic openness and growing interdependence between the countries of the world. As globalization progresses, economic, social and political systems of different countries more freely interact with one another and adapt to promote further interaction.

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Levels of Globalization• World level globalization

• Country level globalization

• Industry level globalization

• Firm level globalization

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Characteristics of globalization• Rapid growth in international financial

actions

• Fast growth in trade

•  The emergence of global markets

•  The diffusion of technologies, ideas and communication system

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Advantages of Globalization• Competitive and learning effects

• Technological gains

• Larger markets

• Outsourcing and sub-contracting advantages

• Greater specialization

• Price stabilization

• International investment inflow

• International economic cooperation.54

Disadvantages of globalization• Spread of economic evils

• Jobless growth

• Loss of economic sovereignty

• External technological dependence

• Drain of basic raw materials

• Problem of shift from national priorities

• High burden of dividend outflow.

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Major Steps Towards Globalization in India

 •  Control of devaluation of rupee

•  Market determined exchange rate

•  Import liberalization

•  Opening up to foreign capital  56

Globalization- impact on Indian economy

• Capital-oriented Globalization

• Worsening Distribution

• Jobless Growth

• Mc’Donaldization

• Globalization and Capitalism

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PRIVATIZATION• Privatization means transfer of ownership

and/or management of an enterprise from the public sector to the private sector. It also means the withdrawal of the state from an industry or sector partially or fully. Another dimension of privatization is opening up of an industry that has been reserved for public sector to the private sector.

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Defects of public sector:• Economic inefficiency in the production activities of the

public sector, with high costs of production, inability to innovate, and costly delays in delivery of goods produced

• Ineffectiveness in the provision of goods and services, such as failure to meet intended objectives, diversion of benefits to elite groups and political interferences in the management of enterprises

• Rapid expansion of bureaucracy, severely straining the public budget causing problems in labour relations within the public sector, inefficiency in government, and adverse effects on the whole economy.

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Ways of Privatization• One of the important ways of privatization is divestiture

or privatization of ownership through the sale of equity.• Denationalization or re- privatization is another way of

privatization.• Another way of privatization is contracting. Government

may contract out services they have planned and specified to other organizations that produce and deliver them.

• Franchising is another way of privatization in which the delivery of certain services in designated geographical areas is authorized to private players.

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Conditions for success of Privatization:

• Political commitment• Multiplicity of private suppliers• Fewer regulations on private sector• Freedom of entry

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Benefits of Privatization• It reduces the fiscal burden of the state by relieving it of the

losses of PSUs and reducing the size of bureaucracy.• Privatization of PSUs enables the government to mop up

funds.• Privatization helps the state to trim the size of the

administrative machinery.• It enables the government to concentrate more on the

essential state functions.• Privatization helps accelerate the pace of economic

development as it attracts more resources from the private sector for the development.

• It may result in better management of the enterprises.• Privatization may also encourage entrepreneurship.• Privatization may increase the number of workers and

common man who are share holders. This could make the enterprises subject to more public vigilance.

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Arguments against Privatization

• The public sector has been developed with certain noble objectives and privatization means discarding them in a single stroke.

• Privatization will encourage concentration of economic power to the common determinant.

• If privatization results in the substitution of monopoly power of the public enterprises by the monopoly power of private enterprises, it will be very dangerous.

• Privatization many a times results in the acquisition of national firms by foreign firms.

• Privatization of profitable enterprises, including potentially profitable, means foregoing future streams of income for the government.

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Arguments against Privatization

• Privatization of strategic and vital sectors is against national interests.

• There are well managed and ill managed firms both in the public and private sectors. It is not the sector that matters, but the quality and commitment of management.

• The capital market of developing countries is not developed enough for efficiently carrying out privatization.

• In many instance, there are vested interests behind privatization and its amounts to deceiving the nation. The UNDP’s Human Development Report 1993 observes that in many countries privatization often has been a ‘garage sale’ to favour individual and groups.

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Disinvestment in India• The disinvestment policy as enunciated by

Chandrashekhar government in interim budget 1991-92, was to divest up to 20% of the govt. equity in selected PSUs in favour of public sector institutional investors. The objective of the policy was stated to be to broad- base equity, improve management, enhance availability of resources for these PSUs and yield resources for the exchequer. In 1993 govt. of India set up a committee on disinvestment in public sector enterprises under chairmanship of C. rangarajan.

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Disinvestment Commission• Disinvestment commission is an advisory body and its

role and function would be to advise the govt. on disinvestment in those public sector units that are referred to it by the government. The commission shall also advise the government on any other matter related to disinvestment as may be specifically referred to it by the government, and also carry out any other activity related to disinvestment as may be assigned to it by the government. In making its recommendations, the commission is also required to take into consideration the interests of workers, employees and other stake holders, in the public sector unit(s).

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Disinvestment Commission• The commission has recommended disinvestment at

varying levels for a number of PSUs for example MFIL, GAIL, MTNL, CONCOR, PHL, PT&T, HVOC, HCIL, RICL, R-ASHOK and U-ASHOK and NALCO.

• Strategic sales in various proportions have been recommended for many enterprises like BALCO, ITI, HTL, KIOCL, ITDC, BRPL, MFL, HCL, SCI, EIL, EPIL, HPL, IBP, NEPA, HZL, PPCL, FACT, HLL, IPCL, NFL and SAIL. For several enterprises, namely, ONGC, MOIL, OIL, RITES, PGCL, NTPC, NLC and NHPC, the commission has advocated no disinvestment for the present.

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Industrial Sickness• Sickness is a relative concept• According to Reserve Bank of India, an industrial

unit is regarded as sick if it has incurred cash loss for one year and in the judgment of the bank, it is likely to continue to incur cash loss in the two following years and it ha s imbalance in its financial structure such as current ratio being less than 1:1 and worsening debt- equity ratio.

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• The sick Industrial Companies Act 1985, as amended in 1993, defines a sick industrial company as an industrial company which had at the end of any financial year accumulated losses equal to or exceeding its entire net worth.

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Symptoms of industrial sickness• Common symptoms of industrial sickness

include failure to pay statutory liabilities like provident funds and E.S.I contributions, failure to pay timely installment of capital and interest on loans taken from financial institutions and through public deposits, increase in inventories with a large number of slow or non moving items, high rate of rejection of goods manufactured, low capacity utilization and frequent industrial disputes.

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Weak units• An industrial unit is termed as weak if at

the end of any accounting year it has:

• Accumulated losses equal to or exceeding 50% of its peak net worth in the immediate preceding five accounting years.

• A current debt equity ratio of less than 1:1

• Suffers a cash loss in the immediately preceding accounting year.

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Cause of sickness• Lack of experience of promoters, wrong selection of

project, faulty project planning etc may give birth to a sick unit.

• Paucity of funds and faulty financial management any also cause the birth of sick units

• Time and cost overruns sometimes prove be very disastrous particularly in the case of large projects and it can make a foundation of sick unit by birth.

• Sickness may arise from locational problems also.

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Cause of sickness• Technological factors like selection of obsolete

or improper technology can also cause industrial sickness.

• Wrong assessment of market potential or faulty demand forecasting, change in market conditions, change in consumer’s tastes and preferences can also bring sickness to the companies.

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Preventive and Curative measures• Sick industrial companies act was passed

in 1985.

• Industrial reconstruction bank of India was established to assist the rehabilitation of non-SSI sick units.

• National textile corporation was established to manage sick textile mills taken over by the government.

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Preventive and Curative measures• Central government has established Board of

Industrial and Financial Reconstruction (BIFR) in 1987 as a board of experts to determine the measure to be adopted with respect to the sick company. BIFR can give recommendations regarding-

Financial reconstruction of the company Takeover of management of sick unit by government The sale or lease of part or whole of sick industrial unit. Amalgamation of sick industrial company with another

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